1. No category

Application for provisional CLG support for Housing PFI projects
HRA Cover Sheet
NAME OF LOCAL AUTHORITY:
NAME OF GOVERNMENT OFFICE:
London Borough of Camden
Government Office for London
SCHEME TITLE: Gospel Oak Regeneration
CONTACT NAME AND ADDRESS:
Gavin Haynes
33-35 Jamestown Rd, Camden, London , NW1 7DB
Telephone: 020 7974 3101
Fax: 020 7916 2010
E-mail: [email protected]
SHORT DESCRIPTION OF THE SCHEME:
This proposal outlines the potential for regeneration of the Gospel Oak area. It seeks to deliver
substantial improvements to the public realm, much needed additional affordable housing and
refurbishment of existing homes. Due to the size of the improvement area it is proposed that a PFI
contract would work alongside a Joint Venture vehicle to deliver the outputs required.
TOTAL NUMBER OF PFI SUPPORTED UNITS
OWNED BY THE COUNCIL:
Before Development
Non-Decent (ND): 611
NDs To Be Demolished: 120
TOTAL NUMBER OF FACILITATED UNITS
AFTER DEVELOPMENT (DELIVERED BY JOINT
VENTURE):
For social rent: 700
For shared ownership: 140
After Development
Made Decent through refurbishment: 611
For private sale: 600
Made Decent through re-provision: 120
(These units are not included in the cost model
calculations)
Net New Build: 220
TOTAL NUMBER OF UNITS (DELIVERED BY
PFI):
Before development:
611 affordable rent, 77 leasehold
HAVE SITES BEEN IDENTIFIED? Yes
If so, how many units can be built on those sites?
In total: 1,915
Of which for re-provision: 573
After development:
and for additional new social rent: 567
951 affordable rent, 77 leasehold, 75 shared
Who owns the land? Council
ownership, 60 outright sale
ESTIMATED PFI CREDIT REQUIRED:
£199.91m
WHAT IS THE PROPOSED COUNCIL
CONTRIBUTION TO THE PROJECT: £63m
PLEASE LIST PFI CREDITS BEING SOUGHT OR CONFIRMED FROM ANY OTHER
DEPARTMENT AS PART OF THIS PROJECT: None
Housing PFI Round 6 – Expression of Interest
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Contents
Page
Application for provisional CLG support for Housing PFI projects ...................................1
HRA Cover Sheet ............................................................................................................1
Contents
1.
.........................................................................................................2
Scheme Overview ....................................................................................................4
Current position............................................................................................................5
Outline solution ............................................................................................................7
2. Strategic Context ....................................................................................................10
3.
Housing Demand and Land Availability ..................................................................14
4.
Option Appraisal .....................................................................................................15
5.
Calculation of PFI Credit, VFM and Affordability ....................................................15
Value for Money (‘VfM’) analysis – HMT Spreadsheets in DCLG model .......................19
6.
Market Appetite ......................................................................................................25
7.
Risk Transfer ..........................................................................................................25
8.
Consultation ...........................................................................................................27
9.
Councillor Commitment ..........................................................................................28
10.
Project Management...........................................................................................28
11.
Timetable ............................................................................................................29
12.
Appendices .........................................................................................................30
A.
B.
C.
D.
E.
F.
G.
H.
I.
Location Map...................................................................................................30
Map of the improvement area and 3D modelling.............................................30
Archetypes and photos....................................................................................31
Stock Condition Information ............................................................................35
Option Appraisal..............................................................................................35
Cost Model and related appendices ................................................................35
Market Testing Results....................................................................................36
Risk Map .........................................................................................................36
Letter from the Leader of the Council ..............................................................36
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1.
Scheme Overview
1.1
This proposal outlines an exciting opportunity to transform Gospel Oak - improve
the public realm, provide opportunities for local residents and deliver new
housing in an area of high demand for all tenures.
1.2
In 2007 the Executive approved the Investing in Camden’s Homes strategy to
deliver £413m of investment by 2012 bringing all of Camden’s homes up to the
decent homes standard. A major component of this strategy is estate
regeneration where we are working with residents to develop proposals that will
deliver social and physical regeneration very much in line with the objectives of
PFI round 6.
1.3
Our commitment to meet the borough’s housing challenges and ensure all
developments are sustainable and high quality are a key part of Camden’s vision
to be a borough of opportunity by 2012. Our community strategy sets out our
ambitions to ensure the long term sustainability of the borough and adapt to our
growing population. We are already delivering significant investment in the
borough’s social infrastructure, including the Building Schools for the Future
programme and projects to refurbish leisure centres and housing for older
people. We are putting place-shaping into practice by working across the Council
and our partners to co-ordinate investment and maximise opportunities, including
a programme to release under-utilised Council land.
1.4
Previously Gospel Oak was selected for a Neighbourhood Management pilot and
as part of that the Council commissioned an area-planning exercise in 2003. The
area-plan was informed by resident and stakeholder consultation. Its vision was
to:
Make Gospel Oak an attractive and desirable place where people choose to live
Make all members of the community feel that their homes and local environment
are safe and satisfying and where crime and fear of crime will be substantially
reduced
1.5
This PFI expression of interest proposes that the Council re-visits this area-plan,
identifies what can be learnt and works with residents to develop a holistic
masterplan. The Council believes that PFI can make a significant difference by
securing the necessary funding, leading on the development of an inclusive
masterplan and developing a robust delivery vehicle.
1.6
Due to the size of the improvement area, the proposal is for a PFI project to work
alongside a joint venture vehicle, governed by a single masterplan and
consultation process. The roles of each vehicle are outlined below:
PFI
Delivery of new affordable housing
Delivery of new intermediate housing
Delivery of housing for sale
Public realm improvements – streetscape and
open spaces
Refurbishment of retained Council owned housing
Joint Venture
Delivery of new affordable housing
Delivery of new intermediate housing
Delivery of housing for sale
Public realm improvements - feasibility study
and delivery of railway transfer deck
Table 1 – PFI and Joint Venture Roles
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Current position
Gospel Oak Improvement Area
1.7
Maps of the improvement area are included in Appendix A and B. Key facts are:
•
•
•
•
1.8
the area is 15.23 hectares
the area currently contains 1,261 council owned properties, of which 1,084
are rented and 177 are leasehold properties
the area is 4.78 hectares with a built footprint of 2.8 hectares of open space
amenities in the locality include a number of open space play areas, a primary
health care trust centre, a number of educational facilities ranging from
nursery, primary to secondary, a library, a day centre for residents aged 60+,
an Anglican church, a number of commercial workshops, a parade of shops
located in the North of the area and a popular street market in the south zone.
The current Council-owned housing is mostly medium rise non-traditional
maisonettes and flats, with one small tower and one large tower. Archetypes
photographs are contained in Appendix C.
Stock Condition
1.9
The 2007 borough-wide stock condition survey found that 47% of the Council’s
properties fail the decent homes standard and that 70% would fail by 2010.
Within the Gospel Oak improvement area the failure rate is higher with 82% of
the tenanted units failing now.
1.10
In keeping with the remainder of the Council’s stock the key failures relate to
internal elements such as heating and internal wiring. Windows and thermal
comfort are also areas of failure. Non-key components such as kitchens and
bathrooms also need to be updated.
1.11
The improvement area is served by a communal heating system with an
extensive network of buried heating and hot water pipes. These services need to
be fully upgraded and pipe-work bursts are common on the estates. In addition to
upgrading the communal heating system there is potential for a combined heat
and power (CHP) system to be implemented. Two of the estates, Weedington
and Lamble, have ‘Bennie’ lifts that are obsolete and parts are hard to source.
1.12
In terms of exceptional extensive works, the Wendling Estate has design issues
with its internal drainage system. There are very limited options for upgrading this
system in its current form.
1.13
The summary of current stock condition information is contained in Appendix D.
Further information can be provided as required. The borough-wide stock
condition survey report can be found at:
http://www.camden.gov.uk/ccm/cms-service/download/asset?asset_id=679592
Outline solution
Overview
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1.14
The improvement area to be covered by the master-plan and consultation
process is outlined in Appendix A and B. The initial proposal and assumed
outputs are detailed below.
Public Realm
1.15
The proposal envisages creation of a traditional street hierarchy with different
treatments for primary and secondary routes, and a greater emphasis on
pedestrianisation and cycle routes.
Clearer boundary treatments around
buildings, streets and activity zones along with improved signage will create a
safer and more legible environment.
1.16
The creation of more communal gardens and defensible spaces around housing
sites will aim to deliver more of a sense of ownership, better use of open space
and a much higher degree of community safety. There will be an emphasis on
ecology and sustainability in soft landscaping schemes. Play facilities, with an
emphasis on ‘natural’ play as well as more sports / kick-about provision areas will
be coordinated with pedestrian zones to make these safely accessible.
1.17
A major opportunity that could be included in the JV element of the proposal is a
deck over the existing railway cutting. This is currently being studied and if viable
will provide a substantial increase in open space with the opportunity to create a
linear park which will increase permeability throughout the site. Greening of the
central area around Lismore Circus and the creation a small amount of A3 and
D2/3 commercial space will aim to create an activity area which becomes a
destination for people from a much wider area.
New Housing
1.18
There are a number of aspirations for all of the new housing provision:
•
•
•
•
•
•
Parker-Morris + 10%
NHBC Code 4
Mixed, tenure-blind blocks
No family accommodation over 4 floors high
Lifetime homes standards
Low levels of sound transmission
1.19
There are evidently costs associated with achieving space standard increases
and higher levels of sustainability. At this stage these remain aspirations:
sustainability measures and standards continue to develop and space standards
will be sensitive to both price fluctuations and planning consents. It is anticipated
these will be the subject of further detailed consultation with residents and
stakeholders to establish relative priorities between, for example, higher
sustainability standards versus higher space standards within dwellings.
1.20
Another key objective is to achieve high quality design and innovation in the
delivery of all aspects of the built environment. The proposal anticipates a bias
for contemporary design.
1.21
The anticipated massing and scale of the new architecture will be challenging. In
order to achieve higher densities on site whilst increasing open space, there will
be a need for a number of taller blocks. It is anticipated that sensitive lettings
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policies with emphasis on on-site management and security will allow the
creation of high quality, sustainable housing in taller, tenure blind blocks and thus
free up space both for open space and for low-rise family dwellings.
1.22
The proposed housing mix follows the London Plan and Camden UDP standards
in terms of social and intermediate housing provision. Any affordable rented
housing that needs to be demolished will be re-provided. It is envisaged that new
housing provision will be close to a ratio of 35:15:50 - social, intermediate,
private. The proposal envisages the PFI element of affordable rented housing at
a higher ratio. This is in essence the springboard to free up development land for
the wider regeneration project and will generate decant capacity so that current
residents have the option to move to new homes within the improvement area.
Refurbishment of Retained Units
1.23
The proposal aims to refurbish retained stock to a very high standard
incorporating new services and wider area service infrastructure (the heating and
hot water infrastructure requires substantial investment and CHP is a viable
option). There will be a strong emphasis on providing substantial improvements
to thermal insulation as well as other energy and water use reduction measures.
It is anticipated that the retained stock will be that which provides the best fit with
the new master-plan and can viably be refurbished and maintained to meet
resident aspirations and decent homes standard in the long-term.
Maintenance Services
1.24
It is proposed that maintenance services for the retained housing stock and new
affordable housing units will be provided by the PFI. This will ensure that these
assets are maintained to the required standard for the contract period with no
conflict over guarantee periods or splits of responsibility. It is also assumed that
environmental services such as grounds maintenance will be delivered through
the PFI contract.
Housing Management Services
1.25
The Council has recently concluded a root and branch review of its housing
management service. This has lead to the development of a sustainable service
with centralised teams for key functions. It is therefore proposed that housing
management services for retained units and the affordable rented units delivered
through PFI will continue to be delivered by the Council. This has worked very
successfully on the Chalcotts PFI project and the Council will put in place the
specific local support to facilitate decanting, tenancy management and property
access required to deliver the project. The Council is open to exploring
management arrangements further as the business case is developed.
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Summary of proposed outputs
1.26
The target outputs of this expression of interest are set out in Table 2:
PFI Cost Model Outputs
Affordable rented housing – 340 units
Intermediate housing – 75 units
Housing for sale – 60 units
Public realm improvements – £15m
Refurbishment of Council-owned housing –
611 tenanted, 77 leasehold units at £31m
Joint Venture Capacity Study
Affordable rented housing – 700 units
Intermediate housing – 140 units
Housing for sale – 600 units
Feasibility study and delivery of railway
transfer deck – up to £20m
Net increase in affordable rented housing – 567 units (220 under PFI)
Net increase in intermediate housing – 215 units (75 under PFI)
Net increase in housing for sale – 560 units (60 under PFI)
Table 2 – PFI and Joint Venture – Target Outputs
1.27
The PFI cost model outputs are conservative and felt to be deliverable. The PFI
model assumed that up to 120 Council-owned units would need to be
redeveloped (demolished and re-provided). This will be explored through the
masterplanning process.
1.28
The outputs for the Joint Venture vehicle are indicative and consistent with
planning policy as expressed within the UDP and the emerging LDF, this is
described further in section 3. The Joint Venture will need to explore through
masterplanning how it will secure the required additional housing within the
improvement area.
1.29
For the Joint Venture to deliver the additional housing required some demolition
of existing stock will be necessary and this housing will be re-provided. The
affordable rented housing delivered through the PFI will generate decant capacity
and provide residents with the option of moving to a new home within the
improvement area.
2.
Strategic Context
Corporate Strategy
2.1
Camden’s resident population of 227,500 is expected to increase by 10%
between now and 2016 if current trends continue. Up to 30% of Camden’s
households are overcrowded, compared with 7% nationally. Residents have
told us that increasing affordable housing and family accommodation is a top
priority.
2.2
Camden’s Sustainable Community Strategy ‘Camden Together’ has a strong
focus on addressing in partnership the complex economic, environmental and
social challenges that the borough faces. The ambition is for Camden to be a
borough of opportunity for all and the Council, as a landlord, is fundamental to
this. The Community Strategy sets out our plans to promote sensitive and
sustainable development and increase the quality and provision of affordable
housing. It also contains a specific commitment to “work with tenants to raise the
standard of social housing across the borough and regenerate individual
estates”.
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2.3
With the Community Strategy setting the overarching strategic framework, the
Council has been developing a ‘place shaping’ programme as a proactive basis
for all services to co-ordinate regeneration and socio-economic development. By
developing this corporate approach to place shaping the Council is better able to
engage and create a dialogue with the voluntary, public and private sectors about
how they can contribute.
2.4
Gospel Oak is a prominent component of the Council’s place shaping
programme. With its high levels of health inequalities and worklessness, it is also
a priority area of focus for Camden’s new Local Area Agreement. This PFI
proposal has the potential to address a number of the LAA targets, either directly
as in delivering additional homes and reducing CO2 emissions, but also indirectly
in terms of improving health and educational attainment and reducing crime and
antisocial behaviour. As such this PFI proposal and the wider masterplanning
process has corporate support.
Stock Options Appraisal
2.5
Following extensive consultation in December 2007 the Council’s Executive
approved the options appraisal and investment strategy – Investing in Camden’s
Homes. The option appraisal established an investment requirement of £413m
between 2007/08 and 2012/13. When current and future resources were taken
into account the Council identified an investment gap of £242m.
2.6
To help bridge this gap it was determined that £100m of investment need should
be addressed by an estate regeneration programme. Four estates were entered
into the first phase and a Gospel Oak PFI and Joint Venture would form a key
part of the second phase. The aims of the regeneration programme are to
improve the sustainability of the housing stock, address investment needs,
improve amenities, facilitate socio-economic development and provide additional,
much needed, affordable housing.
2.7
A copy of the stock options appraisal can be found at:
http://www.camden.gov.uk/ccm/cms-service/download/asset?asset_id=739001
Housing Needs Survey
2.8
The 2008 Housing Needs Survey for Camden provides evidence for continuing
high levels of unmet housing need. According to the survey, the borough faces
an annual shortfall of affordable housing of 4787 units, representing only a slight
reduction on the figure of 5,187 in 2004. There remains a significant shortage of
family sized affordable housing; the biggest proportionate shortfall is for fourbedroom or larger accommodation.
Mayor’s Draft Housing Strategy
2.9
In September 2007 the then Mayor of London’s Draft Housing Strategy placed
emphasis on the supply of family housing, stating ‘the strategy will enable more
family homes to be built, especially in the affordable sector where the need is
greatest and where new supply has been limited in recent years. It sets a new
target that 42 per cent of new social rented homes and, by 2010/11, 16 per cent
of new intermediate homes, should have three bedrooms or more'. Overall the
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strategy seeks the development of 50,000 new affordable homes across the
Capital between 2008 and 2011.
2.10
Since his election in May 2008, Mayor Boris Johnson has written to the Council
proposing an indicative target of 1,000 affordable dwellings to be delivered in
Camden by 2011/12 (to contribute towards the London-wide figure of 50,000
affordable homes). The target is based on Department for Community and Local
Government’s (DCLG) monitored delivery for the last three years. Camden's
Annual Monitoring Report 2006/07 suggests however that the gross addition to
affordable housing stock for 2004 to 2007 was only 504 dwellings. This is clearly
well below the overall annual shortfall of 4787 units estimated in Camden’s
Housing Needs Survey.
2.11
The London Plan target for Camden – for all net additions to housing including
both market and affordable housing – is 595 per annum or 1,785 over three
years. Changes to existing London Plan targets are not being proposed at this
stage.
Planning Policy
2.12
The Development Plan, comprising the London Plan and Unitary Development
Plan, is highly supportive of new housing and making more efficient use of land.
The site has a PTAL rating of 3 which would suggest a density of up to 170
dwellings per hectare could be accommodated and would comply with the
London Plan (2008 Alterations) density matrix. An indicative assessment of the
site envisages a density of 165-175 units per hectare. The potential variance
arises because the extent to which over-decking of the railway cutting is
unknown at this time – over-decking could increase the site by 1 hectare overall.
It is acknowledged that the proposed density could be marginally higher than that
recommended and this indicates further work to ensure the overall housing and
environmental package manages density, design and residential quality
successfully. We believe this is achievable and desirable in any scheme, and
would note that many London planning applications are agreed at higher than
recommended densities.
2.13
There are a number of other planning policy factors that will influence potential
schemes and will need to be taken into account. There are designated areas of
open space and whilst relatively small these are subject to policy presumptions
against
development.
However
the
comprehensive
nature
of
these proposals supports a comprehensive assessment and approach to the
provision and quality of all spaces and proposals intend to enhance and increase
open space in this area.
2.14
There are two protected vistas to the east of the site (Parliament Hill to St Pauls
and Westminster). Whilst it is not envisaged that any new development would
occur within these views, these do not preclude development that is within
specified heights above ordnance datum as set out in the Mayor of London’s
London View Management Framework. Conservation areas and other open
spaces exist adjacent to the area and design will have to take account of
potential impacts on these.
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3.
Housing Demand and Land Availability
3.1
Current market conditions do increase the level of uncertainty over housing
demand and likely new supply in the medium term. The depth and duration of
the current down-turn are uncertain but will continue to depress demand for
homes for private sale and shared-ownership. The increase in repossessions
will in turn fuel demand for affordable rented housing. Overall, however, we do
not envisage that this will substantially affect the pattern of demand which is for
greater supply across all property sizes and tenure types with most acute
demand for larger family accommodation. A detailed analysis of demand in the
borough is set out in Camden’s Housing strategy and related appendices:
(http://camden.gov.uk/ccm/content/housing/housing-policy-andstrategies/camdens-housing-strategy.en)
3.2
This uncertainty does lead to a much greater perception of risk on the part of
potential PFI and JV partners. Camden’s strategy in formulating the PFI
component of the overall masterplan would be to reduce the level of uncertainty
in that element of the proposal by having an increased proportion of housing at
affordable rent and avoiding the need for a PFI contractor to speculate on very
substantial capital investment against future market sales. The public realm work
would make the JV element more attractive and whilst the JV would necessarily
have much greater exposure to the market, there would be greater flexibility for
open-book accounting processes and to time and phase the sale of properties to
achieve best value.
3.3
In terms of land availability, all but 0.2 ha of the site is owned by L.B. Camden
and we anticipate few problems in site assembly.
4.
Option Appraisal
4.1
The options appraisal matrix is set out in Appendix E. The options evaluated
were:
•
•
•
single Joint Venture vehicle
single PFI submission
combined PFI and joint venture submission
4.2
The analysis demonstrated that the single Joint Venture vehicle would find it
difficult to deliver the degree of public realm improvements required through
cross-subsidy alone. Similarly the single PFI solution for the improvement area
would require a PFI credit in excess of £300m and was therefore considered
unfeasible.
4.3
The preferred option that emerged was that of a combined PFI and joint venture
submission. The public realm improvements provided by the PFI will provide a
springboard for the work of the Joint Venture to successfully regenerate the area.
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5.
Calculation of PFI Credit, VFM and Affordability
5.1
The Council has used the CLG financial model (Model) version 1.8 in order to
calculate the level of PFI credits, assess the affordability of the Project and to
demonstrate Value for Money.
PFI Credit
VFM
Affordability at Year 30
£199.79m
8.1%
£0.594m
PFI credit support
5.2
The Council have calculated in accordance with the Model that the maximum PFI
credit request for this Project is £210.324m based on the revenue abatement
method. A summary of this calculation is shown below:
NPV (£’000)
Unitary Charge
233,213
Represented by:
Capital Costs
Set Up/Development Costs
2,100
Capital Contribution
(9,026)
Lifecycle Costs
18,354
Funding Costs
38,908
Operating Costs
22,260
Tax
16,149
Interest and Cash
4,166
Unitary Charge
233,213
Operating Costs
(22,260)
Expensed Set Up/Development Costs
PFI Credits
5.3
140,303
(630)
210,324
The Net Present Value calculation has been undertaken using a discount rate of
5.4% with a base discount date of 1 April 2012, the first year of full operation.
Further details of this calculation can be found in the Model at sheet “O (Detail)”.
Affordability Assessment
5.4
A detailed assessment of the affordability position of the Project over the life of
the concession is shown within the Model at sheet “C(Aff)”. The position has
been summarised in the table below, which illustrates that the Project is
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considered to be affordable based on an assumed PFI credit level of
£199.913m.
5.5
The Council has been able to reduce the level of credit required for the scheme
through its intention to include from its maintenance allowance an amount of
£1,532 per unit per annum into the scheme. This subsidises some of the capital
spend and thus reduced the level of credit below £200m.
COSTS
Total nominal cash flows over the
life of the Project
(£000’s)
Unitary Charge
496,608
Contract monitoring costs
2,195
Total Costs payable by the Council
498,803
Resourced by:
Council HRA contribution
63,283
Other HRA contribution
0
Notional Credit Approval
408,107
Interest accruing on surplus balances
28,007
Total Resources
499,397
Net Surplus
594
Modelling Assumptions
5.6
The approach for the pricing of the scheme has been to use the base cost figures
priced by technical specialists internal to the Council. The capital costs take into
account items such as design fees and contract management which would be
applicable to public sector procurement. All financial inputs and modelling
assumptions were provided by our financial advisers PricewaterhouseCoopers.
5.7
The modelling assumptions for the PFI project inputs are included in the following
table.
Cost Category
Construction Costs
Assumption
Costs are based on Q2 2008 prices and uplifted to assumed financial close
date of April 2012. Costs have been sourced internally.
Construction price inflation has been factored in at 2.5% per annum from
April 2012 onwards.
Construction price contingencies and risk has been priced into the base cost
at 10% of house build construction and refurbishment to reflect the risk
transferred to the operator. This level of risk uplift was included following a
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Cost Category
Assumption
detailed review of risks.
Bid Costs
Bid costs for the PFI are £3m. These have been based on benchmarked PFI
projects of a similar size and factor in the use of Competitive Dialogue to
procure the project.
Lifecycle Costs
Lifecycle costs are assumed to represent circa 1% of construction cost per
annum and have been profiled in accordance with likely spend over the
concession length as a result of expiry of components. .
Construction price contingencies and risk has been priced into the base cost
at 3% to reflect the risk transferred to the operator. This level of risk uplift
was included following a detailed risk workshop with our technical and
financial advisers.
Maintenance Costs
Costs are assumed to be £600 per unit per annum at April 2012 prices. This
is based on benchmarking other Housing PFI projects currently in
procurement. Costs are inflated by 3.0% per annum.
Grounds maintenance is circa £50,000 per annum.
Funding
Assumptions
Funding Assumptions contained in the financial model have been reviewed
by PwC.
PFI Annuity
This nominal Notional Credit Approval is based on a 30 year annuity, which
reflects the 30 year concession period of the Project. For this Project the
Council has also applied the likely 2009/10 notional debt interest rate of
5.4% and the 100% scaling factor.
Value for Money (‘VfM’) analysis – HMT Spreadsheets in DCLG model
5.8
The analysis presented below sets out the inputs utilised and the corresponding
outputs obtained from the VfM section of the DCLG Housing PFI Financial Model
(“DCLG Model”) which compares the costs of public sector procurement (the
“PSC Option”) against the costs of a PFI vehicle (the “PFI Option”).
5.9
As a result of the options appraisal undertaken, the proposed project has been
analysed in both a Public Sector Comparator option and a PFI option. The Public
Sector Comparator is predicated on the basis that the Council would undertake
the project through separately procuring design, build and ongoing maintenance
and housing management contracts.
5.10
The primary use of the DCLG Model is to calculate for a given set of inputs a
potential unitary charge which would be levied by a prospective private sector
bidder. The DCLG Model uses these inputs in order to calculate the VfM inputs.
Accordingly, given the dual importance of the inputs in the DCLG Model this has
resulted in the Council being able to present a robust view of the costs
associated with the PFI Option within the VfM quantitative analysis.
5.11
The format of this analysis follows the worked example shown in the HM
Treasury publication Quantitative Assessment User Guide (the “Guidance”).
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Whole life costs
5.12
In developing the PSC Option costs, the Council has used its experience on
other projects to inform the levels and appropriateness of the PSC costings being
used as set out in the modelling assumptions table above. The base inputs for
the PSC are the same as the base inputs for the PFI option, but do not include
the level of operator risk pricing premium inbuilt into the PFI price.
5.13
It should be noted that all of the costs identified above represent the total cost
over the whole scheme, rather than the annual costs previously utilised within the
VfM model.
Escalators
5.14
All escalators (save for the Unitary Charge and Opex escalator) have been set to
reflect an assumed RPI rate of 2.5% which is in accordance with guidance issued
by CLG in respect of long term inflation rates.
5.15
The Unitary Charge Escalator in an input value within the DCLG Model. The
value has been set such that it closely reflects the percentage of fixed and
variable costs included within the project.
Transaction Costs and Third Party Income
5.16
The input values for public sector transaction costs for the PSC and PFI Options
are £1m and £1.5m respectively, which is 0.75% and 1.1% of Capital
Expenditure respectively. These values have been based on the Council’s
experience on other projects and obtaining benchmarks on other Housing PFI
projects. The PFI Option private sector costs are set to a default rate in the HM
Treasury spreadsheet of 1.5% giving rise to a cost of £2m. It should be noted
that the Financial Model shows bid costs amounting to c. £3m, i.e. 2% of Capital
Expenditure.
5.17
There is limited potential within this project for the generation of additional third
party income. As a result no income has been included at this stage.
5.18
It has been identified that one facet of the proposed PFI contract involves the
sale of land, that is surplus to Council requirements, to the PFI contractor in order
to develop further affordability benefits to the Project. In order to maintain a
prudent approach, at this stage the Council has not included within the PSC and
PFI Options a receipt for the sale of surplus land. This is based on the current
difficulties in the housing market. The Council would propose to review this
position going forward in order to maximise the value of this land and ensure that
appropriate value is gained from its use in the project.
Optimism Bias
5.19
Pre and Post FBC Optimism Bias figures for the PSC Option are set out in the
table below:
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PSC Option – Optimism Bias
Cost type
5.20
Pre FBC Optimism Bias
Factor
Post FBC Optimism
Bias Factor
Capital Expenditure
23.6
20.1
Lifecycle Costs
23.6
20.1
Operating Costs
37.3
32
Transaction Costs
10%
10%
Third Party Income
10%
10%
The figures in the table above are explained as follows:
Capital Expenditure, Lifecycle Costs and Operating Costs
5.21
The starting point for calculating Optimism Bias has been the Mott MacDonald
study into Optimism Bias. Based on the project classifications used within the
study the initial level of Optimism Bias for Capital Expenditure and Operating
Costs was 24% and 41% respectively.
5.22
Using the Optimism Bias sheets within the DCLG Model the Council have
considered which Optimism Bias factors could be mitigated under the PSC
Option pre and post Final Business Case. The level of mitigation is based on
experience gained on previous projects of the Council. It should be noted that the
Council expects the level of uncertainty in terms of risks and costings to decline
as more is known about the project over its procurement lifecycle. Hence, as
seen above, the Optimism Bias post FBC is expected to be lower than Optimism
Bias pre FBC. Further supporting details are provided in Appendix F- Cost
Model and related appendices.
Transaction Costs and Third Party Income
5.23
Stage 1 assessment figures for Pre and Post FBC Optimism Bias have been
retained as it is felt this is a reasonable approximation for the purpose of this
Project.
Flexibility
5.24
It is assumed that the probability of a major scope change happening in year 15
(mid point of the Concession) is 10%. For the PSC Option, the impact of a scope
change corresponds to 10% of Capital Expenditure. The Stage 1 assessment
shows the probability of scope change at 50% and the impact of a scope change
as 50% of Capital Expenditure.
5.25
The differences in the Stage 1 and Stage 2 assessment figures are due to the
work undertaken by the Council in scoping the Project and the relatively
straightforward nature of the services being procured. It is felt that the Council’s
figures represent more accurately the cost of flexibility.
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5.26
For the PFI Option, the impact of the scope change is assumed to be 10%
greater than under the PSC Option. This is in line with the Stage 1 assessment.
Indirect VfM factor
5.27
An underlying principle involved with the procurement of the services from the
private sector under a PFI contract is that it should lead to indirect cost savings to
the public sector.
5.28
However, the Council recognises the difficultly in measuring and quantifying any
benefits and therefore it would seem reasonable to adopt the Stage 1
assessment values for the indirect VfM factor.
Financing
5.29
In respect of the financing assumptions, equity gearing is set at 90% within the
Financial Model. The gearing terms are consistent with the terms currently being
offered in the market. The senior debt inputs include a swap rate of 5.50% and a
bank margin of 100bps plus credit spread of 12bps (including MLA’s). These
terms are considered consistent with terms seen in the market overtime,
although recent liquidity concerns in the financial markets have shown terms that
are higher.
Tax
5.30
The flowchart in section 5.3.4 of the KPMG report in the Supplementary Green
Book Guidance has been used to determine an Accumulated Tax Factor
Adjustment of 12%. See Appendix F- Cost Model and related appendices, for
further details.
Outputs
5.31
Based upon a pre tax Equity IRR target of 13% the HMT Model demonstrates a
‘crude’ VfM of c. 8% in favour of the PFI Option. This suggests that, based upon
the input values used, the PFI Option might deliver better VfM than the PSC
Option for the project under consideration. The indifference point analysis for
capital expenditure are 10% and for the Unitary Charge 9%.
5.32
All other things being equal, the Capital Expenditure under the PSC Option would
have to decrease by c. 10% while the Capital Expenditure under the PFI Option
remains unchanged, for the Council to be financially indifferent between the two
procurement methods.
5.33
Paragraph A.37 of the Guidance indicates that Sponsoring Departments should
work to assist Procuring Authorities to establish certain benchmark tolerances for
indifference points. Whilst the Council is not aware of any benchmark tolerances
the indifference point for Capital Expenditure is well outside the default
benchmark tolerance of 5% as indicated in table A1.2 of the Guidance.
5.34
The indifference point analysis shows that, all other things being equal, the
Unitary Charge under the PFI Option would need to increase by 9%, whilst costs
under the PSC Option remain unchanged, for the Council to be financially
indifferent between the two procurement methods. Again, this lies outside the
default benchmark tolerance of 3%.
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6.
Market Appetite
6.1
The Council held a soft market testing seminar in October 2008 to gauge interest
in regenerations option and, as part of that, interest in PFI round 6. A total of 11
organisations, comprising experienced developers, contractors and lenders,
attended the seminar. Almost all of the organisations attending expressed a
keen interest in working with the Council on a PFI round 6 regeneration project
(one organisation expressed interest in an SPV or JV model only).
6.2
A list of the organisations that expressed an interest is included in Appendix GMarket Testing Results.
7.
Risk Transfer
7.1
Our approach to risk will be based upon the principal that risks should be
allocated to those parties best able to manage them. In allocating risk we have
taken into account standardisation guidance and the experience of parties to
date in procuring HRA PFI projects. A high level review of the main risks is
highlighted below.
Construction and Design
7.2
The contractor will bear the risk for design issues including poor cost control/
estimation, latent defects, the quality of materials and the quality of stock
condition information. Increased time or cost due to changes in design
specification by the Councils will be the Councils’ risk.
7.3
The contractor will bear the risk in construction and refurbishment of retained
stock and ground and site conditions in general. This risk will be passed to the
Contractor as detailed survey warranted information will be made available to the
Contractor during the Competitive Dialogue stage.
7.4
The contractor will bear the risk for operational issues including CDM, health and
safety, cost overruns, maintenance and lifecycle risk, failure to meet performance
or availability standards.
Access to Retained Properties
7.5
The risk of access to retained properties will be shared with the Councils’ taking
the time risk and Contractor any cost overruns.
Maintenance of Properties
7.6
The contractor will be responsible for property management, including voids reservicing, and tenant satisfaction with areas of activity which are the
responsibility of the contractor. The Council’s will manage demand risk and the
risk of tenant or third party damage.
Housing Management
7.7
The Council will retain responsibility for housing management and will therefore
assume risk for rental income, housing benefit, neighbour nuisance and antisocial behaviour and general tenancy matters.
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7.8
The Council is aware that retention of housing management will require an
interface protocol with the Contractor to ensure that any areas of interface such
as tenant access and decant and addressed with the risk residing with the best
party able to manage the risk.
7.9
A risk map is attached as Appendix H which gives more detail on how risk should
be distributed between the contractor and the Council. We will review this
distribution at OBC stage to ensure we can offer a project which is commercially
attractive while transferring appropriate risk to the private sector.
8.
Consultation
8.1
A significant consultation programme, looking in particular at community safety,
public realm and services and amenities was undertaken during the Gospel Oak
area-planning process that commenced in 2003. The results of this consultation
will be reviewed and used as a baseline for future consultation.
8.2
More recently, throughout 2007, the Council consulted extensively on its options
appraisal and investment strategy – Investing in Camden’s Homes. The
consultation outlined the extent of the investment gap and the need to identify
funding solutions. This included consultation on estate regeneration as a means
of delivering local investment and improvements. Overall 14% of the Council’s
tenants and leaseholders (4,484 people) got involved in the consultation and
68% of the 1,110 tenants and leaseholders who responded to the consultation
questionnaire gave their backing to the investment strategy. Our full consultation
results are available to view at:
http://www.camden.gov.uk/ccm/cms-service/download/asset?asset_id=739002
8.3
The Council entered four estates into the first phase of its regeneration
programme in July 2007. On these estates the Council has taken a resident
focussed and consensual approach to consultation. This approach has proved
successful and the Council can provide examples of consultation materials and
methods on request.
8.4
In addition to an expanded estates regeneration team, a consultation and
community engagement team has been established to work with residents
across a range of community initiatives and consultation processes. Camden
has also undertaken to provide independent tenant advisor services to residents
of estates entered into the programme. Camden will continue to develop and
enhance this approach to consultation and provide substantial resources to
support the regeneration project at Gospel Oak.
9.
Councillor Commitment
9.1
A signed letter from the Leader of the Council is enclosed at Appendix I. Ward
councillors have been consulted and support the Council in submitting an
expression of interest and would be very closely involved in taking the proposal
forward.
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10.
Project Management
10.1
The project will be managed through an Executive Board comprising Council
Executive Members, Chief Officers and independent external advisors. This
board will be supported by a panel of officers drawn from different departments to
provide legal, financial, technical and consultation support. In turn this panel will
support a local group comprising project managers, community involvement
officers and ward councillors who will shape and support the local consultation
processes.
10.2
Local consultation processes will have a ‘flat’ approach which aims to obtain the
widest possible constituency of opinion amongst stakeholders. However
representative working groups will have a key role in shaping consultation and
community involvement.
10.3
Camden's existing monitoring arrangements for capital investment projects are
robust, following a PRINCE2 methodology. Camden is the only Local Authority to
achieve accreditation in this area, both through PRINCE and the APM.
10.4
In terms of PFI, the Council has been successfully delivering the Chalcotts PFI
project with its partners United House and Rydon. The experienced gained from
managing Chalcotts PFI will be applied to the Gospel Oak regeneration project.
11.
Timetable
11.1
The milestones for the PFI element of the project are set out below:
Milestone
Submit Expression of Interest
Date
October 2008
Decision on EOI
April 2009
Submit Outline Business Case
December 2009
OBC Decision
March 2010
Commence Competitive Dialogue
April 2010
Close Competitive Dialogue and
Selection of Preferred Bidder
January 2012
Final Business Case Submitted and
Preferred Bidder completion of
planning
January 2012
Financial Close
April 2012
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12.
Appendices
A.
Location Map
B.
Map of the improvement area and 3D modelling
Map of the improvement area
3D modelling of the improvement area
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C.
Archetypes and photos
AREA ONE
Weedington Road Estate
Blocks built in late 70’s with 509 flats which enclose 2 garden areas. Low rise of 4 or 5
storey in height with many balconies and underground garages
Lamble Street Estate
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Estate built in the 60’s and has 125 properties in total with a 11 storey tower block and
several terraces of brick and concrete 2 storey houses
AREA TWO
Wendling and Bacton Estates
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Two sister estates built in the 60’s. Both have several brick and concrete low rise 3 to 4
storey interlocking blocks with underground garages and communal corridor walkways.
The estates contain 489 flats ranging from bedsits to 4 bed flats and 2 purpose-built 9
and 20 storey high rise blocks.
AREA THREE
Waxham & Ludham
Brick and concrete low rise blocks with individual balconies contain 292 homes in total
with underground garages
Built in the early 70’s, blocks contain one to three bed flats and enclose an internal
communal garden space.
D.
Stock Condition Information – Copy Enclosed
E.
Option Appraisal – Copy Enclosed
F.
Cost Model and related appendices – Copy Enclosed
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G.
Market Testing Results
Companies attending the soft market testing workshop who expressed an interest in PFI
Round 6
•
•
•
•
•
•
•
•
•
•
•
Regenter
Wates
Gleeson Capital Solutions Ltd
Powerminster Gleeson Services
Morgan Sindall Investments
Mansell Construction Services
Galliford Try Investments
Rydon Group
Inspace Homes
Bank of Scotland
First Base
H.
Risk Map – Copy Enclosed
I.
Letter from the Leader of the Council – Copy Enclosed
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